Treasurys gain; Greece goes back to drawing board

For the week, bond prices faell as a deal is seen near

By

DeborahLevine

NEW YORK (MarketWatch) — Treasury prices jumped Friday, pushing yields down from their highest levels in at least two weeks, after European leaders said Greece needed to do more before they would disburse the next tranche of bailout money.

The latest comments reversed some of Thursday’s optimism that Athens would, just in time, be able to avoid defaulting.

Yields on 10-year notes
TMUBMUSD10Y, +1.22%
which move inversely to prices, fell 8 basis points to 1.96%. A basis point is one one-hundredth of a percentage point.

Europe’s week ahead: Greece, earnings

(3:28)

The Greek parliament is scheduled to vote on Sunday, and euro-zone finance ministers will meet on Wednesday to officially sign off on the bailout deal. Nestle, BNP Paribas and SocGen will report earnings.

Yields on 5-year notes
TMUBMUSD05Y, +0.82%
declined 5 basis points to 0.80%, after touching the highest level in about two weeks.

The Eurogroup of finance ministers met Thursday but determined Greece’s parliament must first approve another round of deep cutbacks before they approve what would be a second bailout for Greece, necessary to avoid a messy default.

The Eurogroup is set to meet again on Feb. 15, a timetable that would cut it close logistically for Greece to make a 14.5 billion euro ($19 billion) bond repayment due on March 20. Read story on Greece,

Greek Finance Minister Evangelos Venizelos said a parliamentary vote could come on Sunday and would amount to a referendum on the country’s future inside the euro zone and the European Union.

“Treasurys have rebounded smartly,” said Bill O’Donnell, head of Treasury strategy at RBS Securities. “Enthusiasm of the announced Greek bailout package has reversed as European Union finance ministers demand that Greece austerity measures pass a vote in the Greek parliament along with a written pledge to back the austerity program.”

The main U.S. economic data for the day was a report on consumer confidence for this month, which fell more than analysts anticipated. See story on consumer confidence.

“Overall, a weaker than expected release which has helped the Treasury market at the expense of domestic equities,” said Ian Lyngen, senior government bond strategist at CRT Capital Group.

Weekly sell-off, DB’s outlook

From last Friday, Treasury yields rose for a second week as investors still expect Greece to be able to strike a deal and avoid default. Also, U.S. economic data continues to improve, even if slowly, making investors willing to invest in riskier but better-returning assets than Treasury debt.

Yields on 10-year notes are up slightly from 1.95% a week ago and 5-year yields have risen from 0.79%.

Two-year notes
TMUBMUSD02Y, +1.50%
yield 0.27%, up from 0.24% a week ago but remaining in a very tight range as they are anchored by expectations that the Federal Reserve may keep interest rates low for three more years.

Thirty-year bond yields slipped from 3.15% a week ago.

Other assets generally deemed riskier and more growth-sensitive have moved more because of the liquidity in the system provided by the Fed’s quantitative easing, said Dominic Konstam, Deutsche Bank’s global head of interest-rate research. Currently, the Fed’s policy is to buy up more longer-dated bonds and selling its shorter-dated securities,

“There’s some confusion between that liquidity and a proper economic recovery,” he said. “People get excited when 10-year yields back up to 2% or 2.05% but the reality is that the economy isn’t strong enough to change what the Fed will do.”

Ten-year yields will stay between 1.5% and 2.5% for the year, he said, but mostly in the lower half of that through summer and only higher in the second half of the year, he said.

“The ongoing central bank accommodation — and the European Central Bank is doing important stuff too — will keep risky assets elevated and keep the economy on track for some kind of recovery. But there are a lot of hurdles to get through” and Greece is only one of them, Konstam said.

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